Has your company recently been acquired or gone public via IPO? You now have many things to consider as this windfall relates to your planning. We’ve put together a guide to help you think through best practices in dealing with this.

First of all, if you’re reading this, that means you’ve likely experienced an exit of your company -Congratulations!!! This accomplishment is a major life event! Kudos to you and all your hard work with the company!

First of all, how large is it? 

Acquisitions and IPOs are always exciting, but we have to take a step back for perspective. Did you take a pay cut to join a start-up that is now being acquired or going public, and you’re realizing what you would have earned if you had been with a publicly-traded company the entire time? 

What I mean by this is public companies tend to compensate partly in stock that is received throughout the year vs pre-IPO companies tend to grant stock that isn’t sellable until an acquisition or exit.

Or is this multiples above your annualized compensation, and you’re well ahead of where you would have been anywhere else? 

A very rough rule of thumb

If you are receiving 2-4x your annual salary from this exit, and you’ve otherwise been underpaid for the last few years, you may have essentially caught up to where you would be anyway. 

If you are receiving 10x or more of your annual compensation, this lump sum will likely take additional planning. Depending on how early you joined your company and the exit price, you may even be receiving 50x, 80x, or 100x or more of your annual compensation. This is life-changing and requires additional planning to get perspective on how this windfall affects the rest of your planning objectives. 

Disclaimer: Everyone is different. Having a plan is the only way to determine what’s best for you.

What is your vesting schedule?

These deals are often structured with a 3-to-4-year retention period for employees. You might just follow your normal vesting schedule, or you might receive a cash payout over a multi-year period. It goes without saying that this creates significant retention challenges for the company once these vesting and or lockup periods are up, but that’s probably not something you’re worried about right this second.

Taxes

Taxes may be factored in and taken out of the net proceeds to you…or they may not. If you are someone who does your own taxes, now might be the time to hire a CPA or accountant -at least for the next few tax years- while you sort through this. Estimated taxes and IRS penalties are something you’ll need to be aware of, and receiving expert guidance from a qualified CPA professional could be valuable during this time. 

Did you previously work for the company that is being acquired or going public? 

If you own vested shares or exercised options while employed by the company that is being acquired or going public, it’s time to dust off those old statements. They might be worth something!

Other factors

Sometimes these payouts are in cash. Sometimes they are in stock. There are definite pros and cons of either structure. 

If you are receiving a cash payout over a series of years, this makes the predictability much easier. You know exactly what you’ll receive and when—assuming nothing happens to your employment or the purchasing company over the vesting period. 

If you are receiving stock in the acquiring company—or your company issued you stock that will soon become publicly traded—you have the potential advantage of participating in the future upside of the share price if the company does well. BUT you also participate in the downside if the share price does not do well. This can be incredibly painful to watch!

Remember, not all companies that IPO will experience an increasing share price. I get it. You are passionate about the products that your company sells. You wouldn’t work there if you didn’t feel good about the products! You feel they will continue to command market share, dominate and innovate their space, and continue to enjoy significant year-over-year growth. 

Here’s the hard truth: Wall Street might not care. And even if the company does grow, that doesn’t always mean the share price does. 

Timing of an exit or IPO is often a guessing game

The process of an acquisition and/or IPO is not always that obvious. Many companies go public too early because they are either being pressured to do so by their investors, the market is ripe for a high valuation in the sector that the company’s products are in, or just poor timing by leadership. 

Being a public company sometimes isn’t all that exciting. You’re now subject to quarterly earnings where you are required to reveal nearly every metric on your company. Executives and company leaders now have to balance an investment in the company, which could hurt short-term profitability and potentially the share price, and what investors want, which is for a path to profitability or increased profitability and the share price to go up.

Over the course of history, many companies have gone public and then gone back private. Many have also gone public, had their stock go down significantly, and then bought by another company at a fire sale price (which may be below the initial IPO price!). Or worse, they just fizzle out, their products die off, and another company comes along with a better solution to the same problem. Here’s the hard part—everyone who worked for any company that experienced any of these outcomes felt the same. They all felt the company was the next big thing! The point is, you just never know. 

We teach clients to control the controllable (how much you save, where you save, when and how much stock you sell) and to not worry about the things they can’t control (what the market will do, how taxes will change, what investors think about a particular stock). 

Have a plan

One of the most important aspects of this exit is understanding how it changes your plan. Does this mean you’ve achieved financial independence? Does this mean you should pay off your house? Does this mean you can buy that vacation property you’ve been dreaming about? If it’s important to you, does this mean that you are now able to pay for college fully for your kids?

And even some other questions

Mom isn’t doing well. Can we buy her a house? 

Could I gift money to my kids to help them with their first home? 

Could I invest in my friend's start-up? If so, how much would not otherwise blow up the rest of my plan?

But the most important question of all is…

Do you even want to do any of the things that are mentioned here? Read that last sentence again. Really think about what YOU want. 

It’s incredibly important to take a step back and analyze how this windfall changes things for you. As I said above, it may be the status quo. It may be a life-changing amount of money that creates a legacy you never even knew you wanted. It may mean you can spend more money and do more things! (As we like to say, we teach people how to spend their money so they can live an empowered life).

We’ve all read about the curse of winning the lottery. About 70% of all lottery winners end up going bankrupt within 3 to 5 years because they spend all of their money acquiring things that they can’t actually afford. For example, a paid-off house still has real estate taxes and insurance, and lower cost of living areas often have higher real estate taxes by a percentage of assessed value! 

This is an often occurrence in sports as well, with players in the NFL, NBA, and MLB often having short, very high-income careers and not managing their wealth in a smart way. 

Our clients tend to be normal people. In other words, we don’t work with billionaires. What do I mean by that? The decisions you make based on this windfall can really impact the rest of your life! And that’s exactly what we do. We help people develop and maintain a plan (or adjust their current plan) to prevent money from stealing their freedom so that they can live an empowered life.  

One more thing

The best piece of advice we can give you is…don’t do anything right away. Wait for a minimum of 6 months, ideally 12 months, after receiving your first payout before making any changes other than investing the money. Don’t make any large purchases, don’t pay anything off, don’t buy anyone else anything. Let what just occurred sink in. Take some time to think about what you really want to do with your newfound wealth. 

Disclosures

The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.

The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.